Monthly Archives: January 2015

Private equity funds remain invested in portfolio companies for about 5-8 years and exit at a premium, with an average of 25% returns, at the end of their tenure. Reports suggest that PE funds in India may look at exiting investments worth $30 billion during the current year, those made in 2007-08.

PE funds invested around $19 billion in India in 2007, the highest ever in a single year. This was followed by investments of around $10 billion in 2008.

The collapse of Lehman Brothers in 2008 triggered a global financial crises affecting Indian economy as well. Several other factors, such as challenges on the domestic front and an economic crisis in the Eurozone, arrested any significant inflows in the years to follow. Many funds couldn’t exit their investments due to subdued valuations.

But 2015 marks the end of the eight-year period since 2007 and, two, a recovery in the domestic economy this year is imminent under the new, pro-reforms government. However, with a third of this $30 billion invested in sectors like real estate and infrastructure, which are still grappling with challenges, PE exits may be difficult.

A lot of PE money went into long-gestation projects like retail malls, townships and property investments in tier II and III cities between 2005 and 2008.

PE funds are looking to sell their stakes in such projects back to the developers, but in some cases the latter are not keen. In such situations, the PE fund can consider the arbitration route if it was a structured finance deal. But if it was a pure equity deal, one has to try and come up with a mutually acceptable solution.

The anticipation of an economic rebound has also led to an upswing in Indian bourses, with the Sensex offering a return of around 14% in rupee terms over the last six months. As a result, PE funds may look at exit routes such as initial public offerings (IPOs) later this year, which weren’t preferred in the last couple of years as the markets remained choppy.

Promoter buyback and secondary sales will be the preferred options for most PE players, since there is a bit of an inertia in the IPO market with the experience of investors not being very positive in India – saya experts at Ikia Consulting Services.

According reports released, the average ticket size of PE-backed deals in India has been on the decline even as the volume of transactions has risen. In 2014, PE funds concluded 604 deals with an aggregate value of $12.4 billion. The average deal size stood at $20 million last calendar, down from a high of $59 million in 2007. The number of deals transacted in 2014 was the highest in a decade. The average deal size stood at $59 million in 2007. This decreased to $20 million in 2014. Yet, in volume terms, 2014 saw a rebound in PE investments, recording 604 deals, the highest number of investments in a decade.

The e-commerce space within the larger IT segment garnered significant amount of investments, with the sector attracting a third of the total investments made by PE funds in 2014 through 100 deals. A number of small to medium-sized e-commerce ventures raising small amounts of capital was responsible for pushing up the overall volume and bringing down the value of transactions. The last calendar saw 100 PE exits, which returned over $5billion to investors.

Looking forward, a number of PE funds were keen to evaluate opportunities in companies that sold food products due to expected margin expansion on the back of declining packaging costs led by a fall in crude. Investors will also be eyeing the manufacturing sector.

Overall domestic demand-driven sectors are making a comeback (when it comes to new investment opportunities for PE funds). For many years export-driven sectors like IT and pharma were in vogue. But domestic demand-driven sectors like education, healthcare, financial services, and logistics may find favour now, feels experts at Ikia Consulting Services.

Chennai has a very huge stock of Integrated Townships along the OMR, GST and Chennai-Bengaluru corridor. Most of these projects have 800 and above units promising possession by 2017. if you are a resident of Chennai these may be a good option to look into, as prices quoted are much more affordable.

Large projects is driven mainly by the availability of large tracts of affordable land in these areas, since the city has witnessed a marked increase in land prices in the last few years. Land prices within the city’s municipal corporation limits have been the worst affected as even a single plot of land (about 2,400 sq ft) is priced around Rs 6-12 crore in some areas. Thus, developers find it economically viable to acquire land in the outskirts thereby able to offer prices which are far more attractive.

The existing manufacturing hubs in the GST and the Chennai-Bengaluru corridor and the ever growing IT professionals migrating to the city in the OMR seem to have triggered the need for these projects. All these projects offer facilities that are essential in addition to open spaces.

Being in the outskirts these projects need to be integrated townships, offering self-sustaining infrastructure including provision for schools, shopping areas and even entertainment for the residents. Catering to a broader demography one can get a 1BHK (600-640 sq ft), a 2BHK unit (1200-1350 sq ft) to 3-4BHK units (1700-2200 sq ft) and even villas (2500-3500 sq ft) in this area.

Broadly the prices for these offerings are in the range of Rs 4,200-4,800 per sq ft, depending on the location and the amenities provided.

Mud or earth is used as a building material for construction of walls in many parts of the world. The advantages are that these walls give good thermal insulation. There are several techniques of construction using mud in practice and some of them are adobe, cob wall, rammed earth, wattle and daub.

Plain mud constructions are prone to termite infestation and do not have a wet strength. Hence these require regular maintenance.

This is where stabilization come in, as a technique of improving properties of the mud so that it possesses strength, durability and dimensional stability by retaining its shape and size in both wet and dry conditions without burning.

Stabilised mud blocks (SMB) are made by compacting a mixture of sandy soil in 7% cement and small quantities of lime at optimum moisture in a mud press. The energy consumption for making these press blocks are much lesser compared to that used in making burnt bricks. The dense blocks that come out of the press are cured for 3 weeks by keeping the surfaces moist.

Fly ash, building debris, quarry dust, granite and stone dust etc are locally available additives that can be used to make SMBs that are effective and stronger. Rammed earth and stabilised adobe can be used without the need of a mud block press.

Investment in commercial properties that have ample parking space and the mandatory setback space are viable and profitable. The options available for such investments are in the form of office spaces, industrial buildings and retail outlets. Commercial spaces for tenant use are the best option available currently.

Property developers usually go in for ground plus one floor buildings with ample amenities especially for retails spaces where the demand is for more than 1000 sq ft spaces.

Other viable commercial establishments are marriage halls and warehouses and in India the former has an occupancy of more than 180 days in a year. These also provide lodging facilities to generate higher occupancy rates.

In the case of warehousing facilities, demand is more for spaces in cities that have better connectivity. Other options are development of auditoriums but currently these have a lesser occupancy rate.

The recent reduction in the repo rates by 25 basis points has bestowed the following benefits to the housing sector, according to the experts.

The banks have reduced lending rates by 25 basis points and have passed on the benefits to its borrowers. Some banks have also conferred more reduction in interest rates to its women borrowers.

Banks go in for more repo from RBI and canvass for interest-free and low rate funds. hence they can feast on float funds. Demand for funds will pick up when houses become cheaper. This will also bring down the cost of operation of banks for supervision of construction of individual projects.

The interest rate is not the only factor determining the prices of housing projects. Cost of construction, taxes, labor etc., are crucial. The interest rate can reduce cost to the builders and developers and also the ultimate borrower. The government has been giving tax reliefs by way of interest and principal repayments eligible for tax reliefs which also enthuse investment in housing.

The central bank’s control over the interest rate mechanism was total in the 1980s. Rates for lendings by banks for various purposes were specified by the RBI and no bank had any discretion to deviate from this. Once the liberalised approach to bank control came, benchmarks were laid down. Banks were later required to fix benchmark rates.

The real fact is that the banks lend from the deposits they garner and if the cost of deposits is high, they have to jack up the lending rates too in order to have a reasonable margin to meet the administrative and staff expenses.

The repo is a refinance from the central bank to all banks based on certain parameters of each bank. In case there is a funds mismatch, banks go in for repo from RBI. In a situation where there is low liquidity, then repo is resorted to. When banks are flushed with funds and credit offtake is low, no repo will be resorted to.

The reduction in repo rates can mark the beginning of soft loans. Assisted by the banking sector, as a loan portfolio builder and with promotional policies propelled by the governments over a period of time, the real estate sector can grow substantially.

≈ Comments Off on Suggestions on extending tax benefits to housing sector

Industry body National Real Estate Development Council (NAREDCO) has sought reintroduction of tax benefits for the housing sector to boost demand. The Naredco suggests reintroducing tax benefits under section 80-1B (10) to provide tax benefit for selling price of up to Rs 60 lakh, to boost the housing sector.

The body explains that tax benefit should be extended to the part of the project with 1,000 sq ft residential units in metro cities with a cap of basic selling price of Rs 60 lakh and 1,500 sq ft built up area in non metro cities with a cap of basic selling price of Rs 60 lakh for easier flow of credit.

A letter to Finance Minister Arun Jaitley has requested for withdrawal of section 43CA of Income Tax Act, introduced in the Budget 2013. The reason being that market rates should be the basis for calculating the dues instead of government fixed circle rates, that is quite high creating hardship for home buyers.

A balanced approach should be adopted in Real Estate (Regulation & Development) Bill by addressing the concerns of the developers, like accountability of development authorities. City Master Plan should only be notified if it has all statutory approvals like change in land use, environment clearance, mining, maximum height from AAI etc so that the developer is able to start the work in minimum possible time.

Delays in providing supportive infrastructure and timely approvals by the development authority causes delay in delivery of project, but the Regulatory Bill proposes to penalise only the developer. In order to enhance the ease of doing business, the Bill should also eradicate the grey areas and discretionary powers. Developing authorities with active support of NAREDCO or CREDAI can develop a software, wherein all the approvals including building plans can be filled and approved online by the software itself without requirement of manual intervention.

The Public-private partnership in infrastructure has been a recent initiative, given the necessity to improve infrastructure and the limited funds with the government, also aiming at containing fiscal deficit.

Large projects, primarily in the road sector were undertaken through PPPs. The underlying presumption in the PPP process is that private sector could take informed judgements about the cost of a project and the revenue that would be generated through user charges. Accordingly, it could bid for projects with capital subsidy through viability gap funding (VGF).

With work on high speed trains and expressways yet to start, the government has to look at ways to get PPP back into infrastructure. The traditional method of government funded contracting for project execution in the EPC mode has a natural ceiling flowing from the present necessity of lowering the fiscal deficit.

The need is to allocate risks that the private sector can absorb, to that sector and the Government has to absorb the risks that only it can absorb. The government can take on macro economic risks flowing from GDP growth rates and the private sector can absorb execution risks.

Stalled projects could be taken over and bid out again for annuity based PPPs, since liability of annuity based PPPs commence after three to four years later. Due diligence through credible third party mechanism of valuation would address transparency issues and restore confidence in PPPs.

Perungalathur is the new investment destination for many Chennaiites who work in Tambaram. This town is the southern gateway to the city and is close to the Outer Ring Road that connects to North Chennai. It is also closer to Tambaram Railway Junction and Chengalpattu and Kanchipuram.

The area is connected by road to industrial estates of Guindy, Maraimalar Nagar, Padappai, Oragadam and Sriperumbadur. The Southern railway is renovating and expanding the railway station here and most buses that goes towards Vandalur passes Perungalathur.

The locality is part of the Phase 1 of chennai Monorail network. The road overbridge planned by the highways department and the southern railway will align with the Eastern Byepass project connecting Velachery Main Road at Rajakilpakkam and GST road near Perungalathur station.

The areas is away from city and hence pollution free and has a good social fabric that includes schools, banks and medical facilities.

The CREDAI Up wing recently has reiterated that NCR region has the potential to attract global investors, in a summit -Vibrant Gujarat 2015. The summit played a great role in creating renewed interest around avenues for investment.

As numbers speak for itself, this year saw corporates pledging to invest around Rs 25 lakh crore, highlighting the focus of the global investment community on the subcontinent. The summit projected Gujarat as the gateway for investments into India, and promoted the National Capital region as an investment destination.

CREDAI is educating investors about the ease of investing in Noida and NCR and also offers networking opportunities for the investor and industry as well. The NCR has been projected as a region that is transforming as never before to give opportunities to investors to invest here.

The American E-commerce giant Amazon.com has leased a huge 1.3 million office space in Bengaluru, in the Bagmane World Tech Centre tipping up the rentals in the garden city.

The bill will work out to Rs 55 per sq.ft per month for a bare-bone office space and there could be an additional cost once the space is furnished. Amazon will house back end operations from this space. The deal comes close to Flipkart’s leasing deal signed last month for a 3 million sq ft space in Embassy Tech village for Rs 300 crore at Rs 90 per sq ft for a fully furnished space.

In Bengaluru, e-commerce companies have now become the largest customer for real estate developers absorbing the highest amount of office space available. The companies are expected to add another few million square feet of office space to their existing quota, prompting analysts to project even higher demand for office space.